Stuttering LME nickel trade throws confusion over physical market

Trade in the physical nickel market has slowed down with market participants unsure about how to price deliveries after the London Metal Exchange halted nickel trading and on resumption saw breaker limits hit for several days.

The LME's nickel paper contract is the global benchmark for pricing physical deliveries of the metal required for stainless steel and increasingly for batteries of electric vehicles.

The LME has experienced a multitude of issues in delivering the end of day quote – or cash settled price. The CSPs over the month of trading are aggregated and a monthly average is delivered – this is the price, known as a quotation period or QP, that buyers pay for that month's worth of deliveries.

The LME halted nickel trading on March 8 after prices doubled in a day and broke $100,000/mt after a short squeeze by the Chinese stainless steel giant Tsingshan.

As trade resumed on March 16 there was a "disruption event" where the price hit the lower band of the newly implemented trading limit, meaning the CSP was not delivered for that day. But even without the CSP, a "reference price" was still issued. One nickel salts producer said this had created confusion whether to use this CSP or not.

Discussions were happening with both nickel suppliers and the nickel sulfate consumers on how to price the market, although the nickel salts producer said that March's shipments of nickel sulfate had already been dispatched to customers. The discussion was solely focused on pricing.

"Even with disruption events the price is still used for physical settlement," a spokesperson for the LME said.

Despite this, others were also experiencing issues with settling on pricing.

"Within the supply contract, we will accept [the March QP as per the LME], but my customers are walking away from contracts as the cathode precursor market is so bad," a second nickel sulfate producer said.

"Our customers are asking us to extend the QP to April, but we have to still purchase the raw materials on the March QP," the second nickel sulfate producer said.

"March will be abnormally high, but the downstream is nowhere near at the price. The EV companies are pushing back," the second nickel sulfate producer added.

S&P Global Commodity Insights assessed spot battery-grade nickel sulfate with minimum 22% nickel content and maximum 100 ppb magnetic material at Yuan 47,000/mt DDP China March 24. This is down from an all-time high to Yuan 56,000/mt seen on March 16 – and has fallen lower since LME nickel trading resumed.

Although lithium and cobalt products are experiencing their own high prices, they have different pricing mechanisms – price assessments from price reporting agencies – and therefore price moves cannot be driven by exchange trading.

One of the long-term issues that market participants are concerned about is whether this will create demand decay for nickel-rich battery chemistries and a greater adoption of lithium-ion, or LFP, batteries.

Nickel deliveries into the smelting markets are also becoming strained.

"We have pended contracts and the LME not delivering a CSP doesn't mean they are suspended; we are still delivering units. We had a settlement on March 22, which was backdated for the previous two weeks, so we have a monthly average until March 22," one nickel trader said.

"Some customers missed buying on March 22 and now want the average – but what if it goes up again by 15% tomorrow? No chance," the nickel trader added.

Following the resumption of nickel trading on the LME on March 16, limitations were introduced on price movements per trading day - initially 8% for nickel, but since increased to 15% due to a strong, rapid downward trajectory.

These have been met on consecutive sessions – resulting in the issuance of a "disruption event" notice by the LME. A "disruption event":

"Shall include any event that causes the LME not to publish an Official Price or Closing Price for the relevant metal, for a particular Business Day.

"…for any metal, where a daily price limit is hit for any Prompt Date or would be implied to be hit by a combination of an outright and a carry… "

In response to the uncertainty over what is considered an "official LME close price", prior to and following the reintroduction of trading, a second nickel trader commented: "Why publish a price which hasn't been traded, how can we hedge?"

LME has not responded to further queries as of this writing.

"It's just confusing everyone. We're starting at a level unrealistic in the market [and it] takes forever until we can trade," the second nickel trader added.

"We buy recycled nickel and that depends on the LME for price. So, the market is in limbo as people can't get access to what the price is because of the way it has been trading, it is a little frustrating," one alloy producer said. "Our customers have demand and want to buy but we don't know how to price."

"If nickel is the main component, they aren't making purchasing decisions on cobalt and other raw materials," the alloy producer added.

Several sellers reported not even quoting premiums for physical deliveries given that the LME had not been trading or not delivered the CSP.

This had caused issues with consumers, who need to continually run their furnaces. One nickel trader said some customers would be mothballing production, a decision aided by the rising gas prices. Should this happen, it would impact demand for nickel units.

With additional reporting from Charles Thompson